Question

 Stanford issues bonds dated January 1, 2019, with a par value of $260,000. The bonds' annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $240,832.

 1. What is the amount of the discount on these bonds at issuance?

 2. How much total bond interest expense will be recognized over the life of these bonds?

 3. Prepare an effective interest amortization table for these bonds.

Answer 1

1
Discount	19168	=260000-240832
2
Total interest expense over life of bonds
6 payments of $ 11700	70200
Par value at maturity	260000
Total repaid	330200
Less: Amount borrowed	240832
Total bond interest expense	89368
3
Semiannual Interest period end	Cash interest paid	Bond interest expense	Discount amortization	Unamortized Discount	Carrying value
01/01/2019				19168	240832
06/30/2019	11700	14450	2750	16418	243582
12/31/2019	11700	14615	2915	13503	246497
06/30/2020	11700	14790	3090	10413	249587
12/31/2020	11700	14975	3275	7138	252862
06/30/2021	11700	15172	3472	3666	256334
12/31/2021	11700	15366	3666	0	260000
Total	70200	89368	19168
Workings:
Cash interest paid	11700	=260000*9%*6/12
Bond interest expense = Carrying value X 12% X 6/12
Bond interest expense:
06/30/2019	14450	=240832*12%*6/12
12/31/2019	14615	=243582*12%*6/12
06/30/2020	14790	=246497*12%*6/12
12/31/2020	14975	=249587*12%*6/12
06/30/2021	15172	=252862*12%*6/12
12/31/2021	15366	=256334*12%*6/12